SUPREME COURT ON EMPLOYEE VS INDEPENDENT CONTRACTOR

TAX STATUS

UNITED STATES v. SILK
Supreme Court of the United States
331 U.S. 704; 67 S. Ct. 1463; 91 L.Ed. 1757 (1947)
June 16, 1947

In this opinion, the United States Supreme Court addressed the issue of whether workers in two separate situations were employees under the Social Security Act or whether they were independent contractors. In each case, a company brought suit "to recover sums exacted from businesses by the Commissioner of Internal Revenue as employment taxes on employers under the Social Security Act." In both instances "the taxes were collected on assessments made administratively by the Commissioner because he concluded the persons here involved were employees of the taxpayers." In the first case, "Albert Silk, doing business as the Albert Silk Coal Co., sued the United States to recover taxes alleged to have been illegally assessed and collected from respondent for the years 1936 through 1939 under the Social Security Act." The facts of this case were as follows:

The taxes were levied on Silk as an employer of certain workmen some of whom were engaged in unloading railway coal cars and the others in making retail deliveries of coal by truck. Silk sells coal at retail in the city of Topeka, Kansas. His coal yard consists of two buildings, one for an office and the other a gathering place for workers, railroad tracks upon which carloads of coal are delivered by the railroad, and bins for the different types of coal.

Silk pays those who work as unloaders an agreed price per ton to unload coal from the railroad cars. These men come to the yard when and as they please and are assigned a car to unload and a place to put the coal. They furnish their own tools, work when they wish and work for others at will. One of these unloaders testified that he worked as regularly "as a man has to when he has to eat" but there was also testimony that some of the unloaders were floaters who came to the yard only intermittently.

Silk owns no trucks himself but contracts with workers who own their own trucks to deliver coal at a uniform price per ton. This is paid to the trucker by Silk out of the price he receives for the coal from the customer. When an order for coal is taken in the company office, a bell is rung which rings in the building used by the truckers. The truckers have voluntarily adopted a call list upon which their names come up in turn, and the top man on the list has an opportunity to deliver the coal ordered. The truckers are not instructed how to do their jobs, but are merely given a ticket telling them where the coal is to be delivered and whether the charge is to be collected or not. Any damage caused by them is paid for by the company.

The District Court [i.e, federal trial court] found that the truckers could and often did refuse to make a delivery without penalty. Further, the court found that the truckers may come and go as they please and frequently did leave the premises without permission. They may and did haul for others when they pleased. They pay all the expenses of operating their trucks, and furnish extra help necessary to the delivery of the coal and all equipment except the yard storage bins. No record is kept of their time. They are paid after each trip, at the end of the day or at the end of the week, as they request.

The Collector ruled that "the unloaders and truckers were employees of Silk during the years 1936 through 1939 within the meaning of the Social Security Act and he accordingly assessed additional taxes" under the Social Security Act and the Internal Revenue Code. Silk filed a claim for a refund which was denied. He then brought this action. Both the District Court and the Circuit Court of Appeals thought that the truckers and unloaders were independent contractors and allowed the recovery.

Similarly, in the second case, Greyvan Lines, Inc., a common carrier by motor truck, sued a Collector of Internal Revenue to recover employment taxes alleged to have been illegally assessed and collected from it under the Social Security Act for the years or parts of years 1937 through the first quarter of 1942. The facts in this case were as follows:

Greyvan operates its trucking business... throughout thirty-eight states and parts of Canada, carrying largely household furniture. While its principal office is in Chicago, it maintains agencies to solicit business in many of the larger cities of the areas it serves, from which it contracts to move goods.

As early as 1930, before the passage of the Social Security Act, Greyvan adopted the system of relations with the truckmen here concerned, which gives rise to the present issue. The system was based on contracts with the truckmen under which the truckmen were required to haul exclusively for Greyvan and to furnish their own trucks and all equipment and labor necessary to pick up, handle and deliver shipments, to pay all expenses of operation, to furnish all fire, theft, and collision insurance which Greyvan might specify, to pay for all loss or damage to shipments and to indemnify the company for any loss caused it by the acts of the truckmen, their servants and employees, to paint the designation "Greyvan Lines" on their trucks, to collect all money due the company from shippers or consignees, and to turn in such moneys at the office to which they report after delivering a shipment, to post bonds with the company in the amount of $ 1,000 and cash deposits of $ 250 pending final settlement of accounts, to personally drive their trucks at all times or be present on the truck when a competent relief driver was driving (except in emergencies, when a substitute might be employed with the approval of the company), and to follow all rules, regulations, and instructions of the company.

All contracts or bills of lading for the shipment of goods were to be between Greyvan and the shipper. The company's instructions covered directions to the truckmen as to where and when to load freight. If freight was tendered the truckmen, they were under obligation to notify the company so that it could complete the contract for shipment in its own name. As remuneration, the truckmen were to receive from the company a percentage of the tariff charged by the company varying between 50 and 52% and a bonus up to 3% for satisfactory performance of the service. The contract was terminable at any time by either party.

These truckmen were required to take a short course of instruction in the company's methods of doing business before carrying out their contractual obligations to haul. The company maintained a staff of dispatchers who issued orders for the truckmen's movements, although not the routes to be used, and to which the truckmen, at intervals, reported their positions. Cargo insurance was carried by the company. All permits, certificates and franchises "necessary to the operation of the vehicle in the service of the Company as a motor carrier under any Federal or State Law" were to be obtained at the company's expense...

A manual of instructions, given by Greyvan to the truckmen, and a contract between the company and Local No. 711 of the International Brotherhood of Teamsters, Chauffeurs, Stablemen and Helpers of America were introduced in evidence. It suffices to say that the manual purported to regulate in detail the conduct of the truckmen in the performance of their duties, and that the agreement with the Union provided that any truckman must first be a member of the union, and that grievances would be referred to representatives of the company and the union.

A company official testified that the manual was impractical and that no attempt was made to enforce it. We understand the union contract was in effect. The company had some trucks driven by truckmen who were admittedly company employees. Operations by the company under the two systems were carried out in the same manner. The insurance required by the company was carried under a blanket company policy for which the truckmen were charged proportionately.

The federal district court found "the truckmen were independent contractors" and held for Greyvan. The court of appeals affirmed. The United States appealed. The Supreme Court granted review of this decision.

According to the Supreme Court, the specific issue in this case was "whether truckmen who perform the actual service of carrying the goods shipped by the public are employees of Greyvan." As noted by the Court, "[t]he problem of differentiating between employee and an independent contractor, or between an agent and an independent contractor, has given difficulty through the years before social legislation multiplied its importance."

[T]he legal standards to fix responsibility for acts of servants, employees or agents had not been reduced to such certainty that it could be said there was "some simple, uniform and easily applicable test."

Despite such uncertainty, the Court found "no indication that Congress intended to change normal business relationships through which one business organization obtained the services of another to perform a portion of production or distribution."

Of course, this does not mean that all who render service to an industry are employees. Obviously the private contractor who undertakes to build at a fixed price or on cost-plus a new plant on specifications is not an employee of the industry thus served nor are his employees. The distributor who undertakes to market at his own risk the product of another, or the producer who agrees so to manufacture for another, ordinarily cannot be said to have the employer-employee relationship. Production and distribution are different segments of business. The purposes of the legislation are not frustrated because the Government collects employment taxes from the distributor instead of the producer or the other way around...

Few businesses are so completely integrated that they can themselves produce the raw material, manufacture and distribute the finished product to the ultimate consumer without assistance from independent contractors... Where a part of an industrial process is in the hands of independent contractors, they are the ones who should pay the social security taxes.

According to the Supreme Court, an industry's "right to control how work shall be done is a factor in the determination of whether the worker is an employee or independent contractor.

Generally the relationship exists when the person for whom services are performed has the right to control and direct the individual who performs the services, not only as to the result to be accomplished by the work but also as to the details and means by which that result is accomplished. That is, an employee is subject to the will and control of the employer not only as to what shall be done but how it shall be done. The right to discharge is also an important factor indicating that the person possessing that right is an employer.

Other factors characteristic of an employer are the furnishing of tools and the furnishing of a place to work, to the individual who performs the services. In general, if an individual is subject to the control or direction of another merely as to the result to be accomplished by the work and not as to the means and methods for accomplishing the result, he is an independent contractor, not an employee.

If the relationship of employer and employee exists, the designation or description of the relationship by the parties as anything other than that of employer and employee is immaterial. Thus, if two individuals in fact stand in the relation of employer and employee to each other, it is of no consequence that the employee is designated as a partner, coadventurer, agent, or independent contractor. The measurement, method, or designation of compensation is also immaterial, if the relationship of employer and employee in fact exists.

Individuals performing services as independent contractors are not employees. Generally, physicians, lawyers, dentists, veterinarians, contractors, subcontractors, public stenographers, auctioneers, and others who follow an independent trade, business, or profession, in which they offer their services to the public, are independent contractors and not employees.

Further, the Court stated that a contract is not conclusive evidence of independent contractor status. According to the Court, a contract, no matter how "skillfully devised," should not be permitted to shift tax liability from a business to its agent in a manner which frustrates the purpose federal employment tax laws. Rather, the degree of control exercised by the business and the independence of the worker over the operational details of the work product must be analyzed in each situation.

Probably it is quite impossible to extract from the statute a rule of thumb to define the limits of the employer-employee relationship... [T]he courts will find that degrees of control, opportunities for profit or loss, investment in facilities, permanency of relation and skill required in the claimed independent operation are important for decision. No one is controlling nor is the list complete.

Applying these principles to the facts of the Silk case, the Supreme Court found that the unloaders were not independent contractors.

They provided only picks and shovels. They had no opportunity to gain or lose except from the work of their hands and these simple tools. That the unloaders did not work regularly is not significant. They did work in the course of the employer's trade or business... Silk was in a position to exercise all necessary supervision over their simple tasks. Unloaders have often been held to be employees in tort cases.

Accordingly, having found the unloaders to be employees, the Supreme Court reversed the judgments of the lower courts which had found the truck loaders in Silk to be independent contractors.

Applying these same principles to the Greyvan case, the Supreme Court reached the opposite conclusion. According to the Court, "where the arrangements leave the driver-owners so much responsibility for investment and management as here, they must be held to be independent contractors."

These driver-owners are small businessmen. They own their own trucks. They hire their own helpers. In one instance they haul for a single business, in the other for any customer. The distinction, though important, is not controlling. It is the total situation, including the risk undertaken, the control exercised, the opportunity for profit from sound management, that marks these driver-owners as independent contractors.

As a result, the Supreme Court affirmed the decision of the lower courts which had held the truckers in Greyvan to be independent contractors.